USD May Further Weaken as FX Market Volatility Returns - DB

Three themes have emerged over the past week that shows market volatility is returning and may further weaken the dollar, Deutsche Bank strategist George Saravelos wrote in a note.
* Euro “liberated” by ECB’s Mario Draghi signaling that central bank considers low inflation temporary; EUR/USD has seen “complete breakdown”
** Euro can seemingly strengthen despite, and not because of, higher bond yields
** Medium-term rebalancing of structural post-crisis underweights in European assets is the main driver of euro appreciation, not ECB hawkishness
* Market ignoring U.S. Fed’s tightening actions and language has resulted in “Fed zombification”
** Unless market believes U.S. inflation will accelerate, tightening by the Fed will continue to look like easing
** Fed may have to pause tightening until productivity or inflation picks up as the terminal rate approaches
* Coordinated shift of global central banks in hawkish direction can do “serious damage” to the dollar, given that Fed has already started tightening and other developed central banks are
still in planning stages

Source: Bloomberg Pro Terminal

Trader - S. Fuchedzhiev

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